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Editor's Notebook

Service is at the Heart of Profitability

Originally published
Originally published: 11/1/2023

The Harvard Business Review published an article about the service industry a little over a decade ago that I believe bears revisiting. The piece is titled, Putting the Service-Profit Chain to Work1, and is about how service leads to profitability. The authors drill down the true meaning of service and explain that to grow in a service industry, CEOS should refer to the profit chain model. The hierarchy of the model is: executives serve employees who serve customers – and the chain continues. The notion is that this way of looking at service is not only about a tangible, quantifiable value for the service but also the intangible value – and both are equally important. This shift in focus asks owners to adopt a deeper understanding of what service means. According to the research, a chain of profitability occurs and can be quantifiably maximized and traced when owners approach service from this model. 

An Opportunity for Growth

According to the article, the service industry business model has changed since the 70s and 80s. No longer solely about delivering supplies or fixing an HVAC system – the mere competent delivery of the service or product – but it’s now also essential to understand the softer intangible notion of service and adapt it as an overall value tier within your business. That value shift can provide an opportunity for profitability, growth, and employee retention! 

Practically, if a customer orders a service and you deliver on the promise, you will make money. That is the quantifiable part of being in a service business. However, the authors ask entrepreneurs to ponder how a deeper understanding of being in the service field can increase profits. As it applies to business – i.e., how you treat employees, company values, and how you model these values translates to the customer. Is this your paradigm?  If it’s not, and your model is product and money-focused first, that is completely legitimate, but the alternative model, at least according to the profit chain, claims to potentially offer a more profitable alternative by flipping the old model on its head.

In 2008, the date of publication, the idea of making your employees as important as your product may have been a newer concept. However, according to those entrepreneurs referenced in the piece who live by this profit chain model, understanding the very heart of service is essential to be maximally profitable. To quantify the meaning of a service as only the B2C delivery of what is commercially promised – a repair, a product, a replacement part delivered for money – is to miss the point. 

Service First

In the article, the authors cite mega-moguls who were early purveyors of this business model to show how it led to better business. Like William Pollard, the chairman of ServiceMaster, who is just one example. Pollard underscores the importance of “teacher-learner” managers, who have what he calls “a servant’s heart.”

For many of these CEOs, the focus is first on serving customers and employees. The piece references the late Herbert Kelleher, former CEO of Southwest Airlines, and billionaire, stating that he “could often be found aboard airplanes, on tarmacs, and in terminals, interacting with employees and customers. Kelleher believed that hiring employees who have the right attitude was so important that he told Forbes, ‘The hiring process takes on a patina of spirituality’ – a term he used to describe his philosophy in 1996. In addition, he believed that entrepreneurs who viewed work solely in terms of material wealth were missing the very heart of business profitability in the service industry – the people.” 

The Profit Chain – No Weak Links

According to the profit chain theory, there is a direct correlation between profitability, customer loyalty, employee satisfaction, and in turn employee loyalty, and productivity. It’s a circular chain that apparently has been proven to deliver maximum profitability.

The links in the chain are as follows2

1. Profit is stimulated primarily by customer loyalty.
2. Loyalty is a direct result of customer satisfaction.
3. Satisfaction is influenced by the value of services provided to customers.
4. Value is created by satisfied, loyal, and productive employees. 
5. Employee satisfaction results from high-quality support services, policies, and technology that enable employees to deliver exemplary service to customers.

While it isn’t the truth for all business owners, it’s certainly an interesting approach and one that resonates with the now uber-sensitive, hyper-vigilant consumer base. Things to think about…

Happy Thanksgiving from HVACR Business!

[1.] [2.] Putting the Service-Profit Chain to Work (2008) by James L. Heskett, Thomas O. Jones, Gary W. Loveman, W. Earl Sasser, Jr., and Leonard A. Schlesinger https://hbr.org/2008/07/putting-the-service-profit-chain-to-work

Heather Langone is the Managing Editor of HVACR Magazine. For comments and feedback, email hlangone@hvacrbusiness.com.

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